Sector Report

The SBV recently issued Circular 11/2021/TT-NHNN (Circular) for loan classification and loss provisioning, which takes effect 1 Oct 2021. The frequency of loan classification and provisioning was increased from “at least quarterly” to “at least monthly”, which allows for a more aggressive and earlier address of credit quality deterioration. That being said, most banks under our coverage already appear to classify loans and make provisions monthly. However, this Circular, from our perspective, acts more as a document to ensure the sector applies the same standards across the board. As a result, we do not anticipate this Circular to lead to a significant change in bank risk management. It should be noted, however, that Circular 11 does not apply to banks which are under special supervision. We also find an exception to the classification of loans/deposits which are used to support specific banks under special supervision. These exceptions could also apply to banks which are willing to support banks under special supervision, potentially facilitating a resolution of the ‘zero-dong’ banks. Overall, this Circular provides a more coherent framework for loan classification and provisioning. 

Earnings growth shall normalize in 2H21 at 15.5%YoY and 22.2% YoY in 2022. 1H21 earnings growth for banks under our coverage is estimated to be a stellar 55-60% YoY, backed by solid NIM expansion and robust credit growth (7.9% YTD and 18.1% YoY in 1H21 vs. 4.6% YTD and 10.3% YoY of 1H20). For 2H2021 and 2022, we believe that the advantage of NIM expansion will be difficult to maintain. Meanwhile, credit growth may be slightly lower than 1H21 if we assume a credit growth target for the whole banking system in 2021 of 13%. Hence, growth in 2H21 is dependent upon the SBV’s extension of credit limits for commercial banks. For banks under coverage, we assume outstanding loans at December 31, 2021 to increase by 15.7% YoY, leading to a normalized average 2H21 earnings growth of roughly 15.5% YoY

The Ministry of Planning and Investment is drafting a new Decree to replace Decree No. 82/2018/ND-CP to better regulate IPs and EZs. Some of the proposed regulations: 

1. Decentralization of authority. The draft Decree allows for the decentralization on the procedure to establish new IPs, and to adjust and expand the existing IPs by authorizing either: (1) the Minister of Planning and Investment; or (2) the People's Committee of the province.  According to the Decree No. 82/2018/ND-CP, all such decisions have to be approved by the Prime Minister. 
2. Regarding the consideration and approval of new IPs, adjusting and expanding IPs: According to the draft Decree, total land area of IPs must be at least 75 ha; and IPs must have at least 5% of the total land area dedicated to SMEs and supporting industrial enterprises. This is a new regulation. 

Nationwide power consumption volume in total kept growing +11.1% YoY in May 2021. 

Despite an +11% YoY increase in power consumption volume, the average price on the competitive market (CGM price) declined -5.1% YoY during May-2021. This was largely due to low utilization from thermal power plants, especially gas-fired plants. 

Oil price to leg higher. The Brent oil price exceeded USD 70/barrel on 1st June, the highest level since June 2019. The rally was triggered by optimism over the fuel demand outlook for the summer, especially as developed countries start to re-open, while Chinese factories continued to expand in May. YTD, Brent crude oil prices averaged USD 63/bbl, increasing 52.7% YoY. Given the recent price action, we have lifted our Brent crude oil price assumption from USD 65/bbl to USD 68/bbl in 2021 (+62.6% YoY) and USD 70/bbl in 2022. For the fuel oil (FO) price, we raise our assumption from USD 330/ton to USD 360/ton (+48.8% YoY) in 2021, and USD 380 /ton in 2022. Our top picks:  We factor updated oil price assumption and roll our valuations forward to mid-2022 for stocks that we have under coverage. Accordingly, we see potential upside for GAS, PLX, PVT, PLC. PVS is also our favorite stock in the sector, however we only recommend accumulating this name on price weakness. 

2021 AGM season has nearly ended, with the theme of equity capital raises just beginning. In particular, the two most heavily weighted sectors (banking and property) which combined represent over 50% of the VNIndex are expected to be most active. While the bank recapitalization story is returning after a two-year hiatus, property developers are finding the current positive market sentiment an opportune time to evolve from bond financing to equity. Provided that earnings dilution isn’t significant, we believe these capital raises could act as catalysts for both sectors’ shares into year end. We remain Overweight on the shares of the residential developers, and somewhat more muted in our outlook for the banks as valuations have already begun to price in the positive outlook. There are, however, some specific names where we are much more sanguine: CTG, TCB and VCB. We also have VPB, TPB and STB in our watch list as they may have upside surprise relating to capital raising plan (VPB, TPB) and turnaround story after settlement of legacy assets (STB).  In property sector, our current top picks are NLG, DIG and DXG for being beneficiaries from improving infrastructure in HCMC and neighboring areas as well as strong earnings growth outlook in 2021.

Lower contracted volume for thermal power plants is mostly due to abundant volume from renewable sources, and favorable volume from hydropower plants.

In light of low contract volume coupled with a higher coal and gas input price, thermal power earnings should be adversely impacted. 

With higher cost from renewable sources and higher gas price as well, EVN will try to control costs. Thus, the other power generators, who are dealing with a revised PPA with EVN, are expected to struggle. 

Additionally, EVN has more incentives to raise the electricity retail price, as higher costs arise from renewable power sources, along with a high-cost new gas field (Sao Vang Dai Nguyet). 

Needs of power transmission projects. Higher weighting from non-dispatchable sources (solar and wind) will require a higher degree of efficiency within the transmission grid in order to transfer this increased power capacity through the existing grid. According to the nationwide capex for power transmission between 2021-2030, total guidance is VND 766 tn, which is 26% higher than the revised PDP VII. 2021 earnings from electricity companies under coverage will differ individually due to many issues surrounding the revised PPA price, including bad debt provisioning; the maintenance pipeline; and changes in input cost. We are concerned about the revised PPA price. Over the long term, EVN likely will see higher input costs from: (i) a higher gas price (as the current low-price gas fields have gradually dried up); and (ii) a significant increase in renewable capacity, with a high FIT in 20 years (from solar and wind power plants). The power generators likely will find it difficult to negotiate the PPA price with EVN over the medium term.  

In term of pre-sales activities, 2021 is expected to be a more active year for residential developers, with a number of new launches set into motion. Specifically, VHM has a plan to launch the low-rise component of Vinhomes Wonder Park (Dan Phuong, Hanoi), along with opening the next phase of its three mega projects (Vinhomes Ocean Park, Smart City in Hanoi, and Grand Park in HCMC) for both bulk and retail sales. Other than these, VHM is preparing for potential launches of projects in second-tier cities as well. As for NLG, we expect that Waterpoint, VSIP Hai Phong, and Mizuki Park are among the projects to be launched in 2021, with estimated presales value to grow by 19% YoY. For DXG, the Company will continue with sales of its low-rise project – Gem Skyworld (Dong Nai) and aims to launch two new medium-sized condominium projects in Binh Duong. Meanwhile, prospects are positive regarding the re-launch of the Gem Riverside project in Dist.2, HCMC, which has been held off in the recent two years due to prolonged procedural issues. On the opposite side, we see that KDH would likely witness a significant decline (-53% YoY) in pre-sales value in 2021 due to an absence of sizable high-rise projects for new launches, with only one low-rise project-Armena to be launched.

The beer sector is sensitive to the pandemic. In 2019, the on-premise channel accounted for approx. 70% of total beer consumption in Vietnam, according to Euromonitor. In 2020, this channel was hurt severely by social distancing. Recovery momentum will continue, but demand is forecasted to return to pre-Covid levels not in 2021 but 2022. Vietnam has handled the Covid-19 outbreaks very well. Catering and entertainment have improved, but food traffic is still a long way off from pre-Covid levels. Trends at restaurants, cafes, shopping centers, theme parks, museums, etc are still weak, down 10% compared to the base line, according to a Dec 2020 Google report. The lack of international visitors has also contributed to less beer consumption. According to GSO, spending of foreign tourists accounted for 5.5% of total retail sales in 2019.